Philips Chief Seen Drawing on Private Equity Past to Make Additional Cuts

By Maaike Noordhuis -
Jul 7, 2011

Frans van Houten, 100 days into his
job as chief executive officer at Royal Philips Electronics NV,
is poised to announce a bigger overhaul of the Dutch maker of
lighting and DVD players, drawing on cost-cutting skills honed
when working with private equity firms.

Van Houten, the former head of NXP Semiconductors, part
owned by Kohlberg Kravis Roberts Co, faces the challenge of
boosting profit and sales growth against a backdrop of slowing
markets for lighting and traditional electronics in Western
Europe and competition from low-cost Asian manufacturers. Shares
of the Amsterdam-based company dropped 8.8 percent on June 22,
when van Houten warned profit from lighting and consumer-
electrical goods slumped in the second quarter.

“You would rather think management layers or specific
product groups may be cut out,” given the job cuts Philips
already made, van Baden said in an interview. He posted on
Twitter: “Philips employees now will experience what van Houten
learned from KKR.”

Since van Houten became CEO, Philips shares have declined
23 percent, paring the company’s market value to 17.7 billion
euros. The company reports earnings on July 18. Fresh cost-
cutting goals may not trigger a share rebound, said Peter Olofsen, an analyst at Kepler Capital Markets. Investors may
instead wait for third-quarter results, and the release of
financial targets reflecting moves such as ceding control of an
unprofitable TV operation, he said.

‘Drastic Measures’

“Drastic measures” are needed to ensure Philips doesn’t
fall short of targets, said Jos Versteeg, an analyst at Theodoor
Gilissen Bankiers.

The company in September outlined a goal for earnings
before interest, taxes and amortization of 10 percent to 13
percent of sales through 2015, and it’s vital that Philips
doesn’t come up short, Versteeg said. Analysts predict 200
million euros in extra costs stemming from sales and research,
and an added 100 million euros in TV spinoff expenses.

Reviewing the workforce will be part of van Houten’s plan
to deepen an existing program called Accelerate, Akkermans said.
The program is designed to bring products to the market more
quickly to push growth. Sales, excluding takeovers, disposals
and currency shifts, grew 4 percent last year.

Growth Challenge

“The story of Philips is about accelerating growth given
they have lowered their break-even point quite a lot since the
downturn,” said Klas Bergelind at RBS. “And in this macro-
environment that is a challenge”.

Second-quarter earnings at lighting and consumer lifestyle
units dropped 60 percent and 71 percent respectively, Philips
predicted. It’s on course to report its worst quarterly result
in two years with analysts estimating a 42 percent drop in EBITA
to 304 million euros.

Advised by consultants McKinsey & Co., van Houten employed
a traffic-light system to warn managers of the company’s 400
business groupings if results are going astray, with those
classified as red indicating a need to make adjustments. His
strategy is focused on decentralizing decision making.

Worst Over

Van Houten is also partway through a clear out of
executives. By the end of this year, five of the six management
board members will have left. Van Houten and Chief Financial
Officer Ron Wirahadiraksa have temporarily assumed the day-to-
day running of lighting operations until management can be
appointed.

Philips in 2009 set out to slash 6,000 jobs to bolster
profitability to deal with the financial crisis, which lowered
demand for products spanning electronic toothbrushes to health
scanners.

Measures already taken probably mean that another cull of
workers is unlikely, union official van Baden said. Of the
119,001 workers in 2010, about 45 percent worked in lighting, 30
percent in healthcare products, and 15 percent in consumer-
goods.

“In every division there are still weak spots,” Theodoor
Gilissen analyst Versteeg said. “If you’re a manager
underperforming within your division, you have a serious
problem.”